The Devil In The Details

*The Devil in The Details*
**By Scott Kersnar**

ScottK***I’ve been wondering lately whether the mortgage industry’s current obsession with regulatory compliance might be opening a door to fraud.  After all, fraud succeeds by distracting underwriters from paying attention to one thing by focusing their attention on another. Take, for instance, Fannie Mae’s 1004MC addendum.  I recently came across an online discussion of whether or not strictly following Fannie’s guidelines on filling out that addendum might lead an appraiser to indicate that the home values in a particular micro-market were stable when in fact they were declining. With everyone eager to have an improving mortgage market lead the economy into full recovery, it seemed to me that a little ambiguity like that could invite fraud.

****The way to correct a possible appraisal misstep like the one above, commented a participant in that online discussion, is to compare macro-market data with neighborhood data. And that’s where an appraisal vendor management firm like Global DMS can be helpful.

****Heavy investor activity is indeed “driving quick price changes and thus opening up small windows where home values can be manipulated by various parties,” noted Vladimir Bien-Aime, president and CEO of Global DMS. “There are many documented cases FBI cases of mortgage fraud activities, and one of the main elements to perpetrate these types of crimes are fraudulent appraisals,” he said, citing a case in West Virginia where an appraiser involved in a multi-million-dollar mortgage fraud scheme included a below-grade basement as “Gross Living Area” to enable using comps that were twice the square footage of a subject property.

****“The problem with identifying the minutia involved with valuation fraud is that your typical underwriter simply doesn’t possess the extensive experience needed to review collateral valuations for quality and fraud,” said Bien-Aime. As a result, he warned, many details in the appraisal review can be overlooked. “There are hundreds of rules utilized by Fannie and Freddie for industry standards that are a requirement designed specifically to mitigate risk and prevent mortgage fraud. It is virtually impossible for the average underwriter to review all of these little details,” he said. “This is why it’s essential to employ collateral review technology that is able to automatically and instantly review thousands of rules to catch potential instances of fraud.”  He cited gross square footage comparisons and distance of comparable as factors that should be incorporated into automated valuation models and the review process. “If such tools were employed in the aforementioned case,” he said, “the misuse of comparables to inflate values would have been detected.”

****Bien-Aime argued that a multi-faceted software system is effective for maintaining effective fraud detection in today’s valuation management process, “which is complex and has many moving parts. It’s risky to deal with too many vendors in what’s become an incredibly compliance-intensive lending landscape,” he concluded.

Since 1996, when he wrote “NetSuccess: How Real Estate Agents Use the Internet,” Scott Kersnar has been chronicling the development of technology in real estate finance. He is a past editor of Mortgage Technology magazine.